Choosing the right business structure is a critical decision that can have long-term financial and operational implications for your company. One popular option is the C corporation, a legal entity that offers benefits like limited liability and unlimited growth potential. However, forming and maintaining a C corporation comes with various costs that entrepreneurs need to consider. This post breaks down the cost of running a C corp to help you make an informed decision.
Understanding the C Corporation Structure
A C corporation is a separate legal entity from its owners, known as shareholders. This structure provides limited liability protection, meaning shareholders are typically not personally responsible for the corporation’s debts and liabilities. C corporations can issue multiple classes of stock, attract investors, and have an unlimited number of shareholders, making them ideal for companies seeking significant growth and investment.
Initial Formation Costs
1. State Incorporation Fees
To form a C corporation, you must file Articles of Incorporation with the Secretary of State in the state where you plan to incorporate. Each state charges a filing fee, which can range from $50 to over $500. Some states also require additional fees for name reservations or expedited processing.
- Example: In California, the filing fee is $100. In Delaware, a popular state for incorporation, the fee starts at $89.
2. Legal and Professional Fees
While it’s possible to incorporate without legal assistance, many businesses choose to hire an attorney to ensure all legal requirements are met.
- Attorney Fees: Legal fees for incorporation services can range from $500 to $2,000 or more, depending on the complexity of your corporation.
- Incorporation Services: Online legal service providers offer incorporation packages starting around $100, not including state fees.
3. Registered Agent Fees
A registered agent is required in most states to receive legal documents on behalf of the corporation. If you incorporate in the state you live, you can act as your own registered agent to avoid this fee.
- Cost: Hiring a professional registered agent service typically costs between $100 and $300 per year.
4. Initial Report and Publication Fees
Some states require newly formed corporations to file an initial report or statement of information and may mandate public notice of incorporation in a local newspaper.
- Cost: Fees for initial reports range from $25 to $200.
- Publication Fees: In states like New York and Arizona, publication costs can vary widely, sometimes exceeding $1,000 depending on the newspaper’s rates.
Ongoing Compliance Costs of a C Corp
1. Annual State Fees and Franchise Taxes
C corporations must comply with annual state filing requirements, which often include:
Annual Report Fees: Most states require corporations to file an annual or biennial report with associated fees ranging from $50 to $200.
Franchise Taxes: Some states impose a franchise tax or privilege tax on corporations for the right to exist as a legal entity and do business within the state.
- Example: Delaware charges an annual franchise tax that can range from $175 to $200,000, depending on the corporation’s authorized shares or assumed par value capital.
- Example: Delaware charges an annual franchise tax that can range from $175 to $200,000, depending on the corporation’s authorized shares or assumed par value capital.
2. Accounting and Bookkeeping Costs
Maintaining accurate financial records is essential for compliance and tax purposes.
- Cost: Professional accounting services can cost $3,600 to $18,000 (or more) annually, depending on the size and complexity of your business.
3. Tax Preparation and Filing Fees
C corporations are required to file a corporate tax return (Form 1120) with the IRS.
- Cost: Tax preparation fees for a corporate return can range from $1,000 to $5,000 annually or more.
4. Legal Compliance Costs of a C Corp
Ongoing legal advice may be necessary to navigate complex regulations and corporate governance requirements.
- Cost: Legal fees can vary widely but budgeting $1,000 to $5,000 annually for legal expenses is common for small to mid-sized corporations.
5. Registered Agent Renewal Fees
The annual cost to retain a registered agent service continues each year.
- Cost: $100 to $300 per year.
6. Meeting and Record-Keeping Costs
C corporations are required to hold annual shareholder and director meetings and maintain corporate records.
- Cost: Costs for meeting spaces, minute books, and record maintenance can add up, potentially costing $200 to $1,000 annually.
Need Help Getting Your Startup's Accounting and Taxes Streamlined, Simplified, and Headache-Free?
Schedule a Free Consultation Today
Taxation Costs
1. Corporate Income Tax
C corporations are subject to federal corporate income tax and may also owe state corporate taxes.
- Federal Tax Rate: The federal corporate tax rate is a flat 21%.
- State Taxes: State corporate tax rates vary, ranging from 0% to 10%. States like Nevada, Ohio, Texas, and Washington do not have a corporate income tax. Minnesota has the highest corporate tax rate at 9.8%.
2. Double Taxation
Profits distributed as dividends to shareholders are taxed twice:
- Corporate Level: Profits are taxed at the corporate rate.
- Shareholder Level: Dividends are taxed on shareholders’ personal income tax returns at capital gains rates, which can be 0%, 15%, or 20%, depending on income level.
3. Payroll Taxes
If the corporation has employees, including shareholder-employees, it must withhold and pay payroll taxes.
- Cost: Payroll taxes generally amount to approximately 10% of wages for employees. For example, if an employee is paid $100,000 per year, expect to pay approximately $10,000 in various payroll taxes on their behalf.
Insurance Costs
Protecting the corporation and its officers from liability often requires several types of insurance.
- General Liability Insurance: Typically costs $400 to $1,000 annually.
- Directors and Officers (D&O) Insurance: Protects personal assets of corporate directors and officers, costing $500 to $5,000 annually.
- Workers’ Compensation Insurance: Required in most states if you have employees, with costs varying based on payroll and industry risk factors.
Miscellaneous Costs
1. Business Licenses and Permits
Depending on your industry and location, you may need various licenses and permits.
- Cost: Fees range from $50 to several thousand dollars, depending on the requirements.
2. Securities Compliance
If issuing stock, especially to the public, compliance with federal and state securities laws is necessary.
- Cost: Legal and compliance fees can be substantial, potentially costing tens of thousands of dollars for public offerings.
3. Administrative Expenses
Additional costs may include:
- Office Supplies and Equipment
- Software Subscriptions for Accounting or Compliance
- Staff Training and Development
Potential Hidden Costs
1. Penalties for Non-Compliance
Failure to meet regulatory requirements can result in penalties.
- Cost: Late fees, penalties, and interest can add up quickly, sometimes reaching hundreds or thousands of dollars.
2. Correcting Filing Errors
Mistakes in filings may require amendments.
- Cost: Amendment filing fees vary by state but generally range from $50 to $150.
Strategies to Manage and Reduce Costs
1. Utilize Online Incorporation Services
These services can simplify the incorporation process at a lower cost than hiring an attorney.
- Examples: Companies like LegalZoom or Bizee offer packages starting at around $100, plus state fees.
2. Maintain Good Standing
Stay on top of compliance deadlines to avoid penalties.
- Tip: Use calendars or software reminders for filing dates.
3. Bundle Services
Some registered agent services offer discounts when bundling with other services like annual report filings.
4. DIY Where Possible
Handle tasks like meeting minutes and record-keeping internally to save on professional fees.
5. Consult Professionals Strategically
Use legal and accounting professionals for complex issues while handling simpler tasks in-house.
Conclusion of Cost of C Corp
Forming and maintaining a C corporation involves a variety of costs, from initial formation fees to ongoing compliance and taxation expenses. While these costs can be significant, the benefits of a C corporation—such as limited liability protection, unlimited growth potential, and enhanced credibility—may outweigh the expenses for many businesses.
Careful planning and budgeting can help manage these costs effectively. It’s crucial to understand all the financial obligations associated with a C corporation to ensure it aligns with your business goals and resources.
Next Steps:
- Assess Your Needs: Determine if a C corporation is the best fit for your business model and growth plans.
- Budget Accordingly: Create a detailed budget that includes all potential costs.
- Seek Professional Advice: Consult with legal and tax professionals to navigate the complexities of incorporation and compliance.
Like this Content and Want More Like it?
Sign up for helpful tips to reduce your taxes, receive tax deadline reminders, and get free resources, guidance, and walkthroughs sent right to your email.
About the Author
Brett Rosenstein
Founder of Build Accounting
Certified Public Accountant
Brett is the founder and president of Build Accounting where he provides accounting, tax filing, and CFO services for tech startups and SaaS businesses. His goal is to make the accounting and tax process as simple, streamlined, and headache-free for business founders as possible.
Brett received a Bachelor of Science in Business Administration from The Ohio State University. He is also a Certified Public Accountant.
When Brett is not working, he is running, biking, spending time with his wife and daughter, or trying new pizza places.
Schedule a Free Trial!
Get started today by scheduling a call to see how we can help your tech startup or SaaS business. We’ll respond as soon as possible.
By submitting this contact form, you consent to receive email communications from Build Accounting, including our newsletter with quick time and tax saving tips. You may opt-out at any time.
